What Can Go Wrong - Weekly Blog # 940

 

 

 

Mike Lipper’s Monday Morning Musings

 

What Can Go Wrong

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

          

 

Preface

In preparing to start a buying program using one of the lessons from betting at the track you should recognize what could go wrong. The purpose of this blog is not to permit betting, but to avoid wagering on one’s ego and failing to learn from the experience.

 

There are four general reasons for not seeing an opportunity as a trap.

1. Not appreciating the goals of the source.
2. Inaccurate data or badly displayed data.
3. Failing to process past mistakes.
4. Too difficult to fathom. (Probably the least in terms of occurrence)

 

Tocqueville, as quoted by Goldman Sachs who deals well with errors. “The greatness of America lies not being more enlightened than any other nation, but rather her ability to repair her faults.” Therefore, I view betting on horses, securities, politics, people, and many other things, as learning experiences.

 

Sources of Mistakes

We all have deeply felt biases. The media and their chorus of pundits use information to motivate repeat use of their work. Thus, they transmit their pronouncements in the way we would like to read, see, or hear. For example, in the latest announcements of the number of people hired, it was better than many expected compared to the prior, shorter month, with bad weather. Deep in the article was the fact that it was not better than the same month last year. Furthermore, if you deduct healthcare and social assistance workers from the total employed, there has been no growth since 2024. Why is this important? The latter group receives payments from the federal government, either directly or indirectly, which will likely have some impact on the midterm elections.

 

This is probably a major reason for the various market indices going up. Using the data for this week only, 2/3rds of the stocks advanced and 1/3rd did not. Even on Friday, there was little focus on the number of new unemployment claims, which rose for the week. There was little coverage of the consumer sentiment survey by the University of Michigan, which hit a new low.

 

When companies release layoff numbers, they are vague and rounded. What disturbs me is that these are some of the most numeric-driven companies: Fidelity, Deloitte, and Commerzbank, all of which announced cutbacks. For some time, established financial and auditing firms around the world have been retiring senior people without hiring replacements. Even some “AI” people have been let go.

 

One of the most dangerous items of news is a shortage of an industry’s goods followed by a new large supply becoming available. Historically, look at what happened to the price of gold when the size of the Latin American precious metal was announced. While it made Spain wealthy, it hurt the other European nations with lots of gold in their vaults. So be careful if quantities jump up while simultaneously being withdrawn.

 

What We Should Have Learned?

Perhaps we should have learned from recorded history the need to negotiate debts payments, date, and rate! Examples include the Babylonians, William Shakespeare’s “Merchant of Venus”, the expansion and depression of the 1920s and 1930s, or even the present occupant of the White House.  

 

Almost every sector in the commercial world has added debt as their currency for expansion. This is one reason to keep an eye on the slowdown in ROTCE (Return on Total Capital Employed). Bearing in mind that this sum does not cover accidents and supply chain issues adequately.

 

Please let me know what you think I can learn. 

                                        

 

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939

Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

 

 

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Ignore Short-term Headlines, Invest for the Long-Term

Pundits focusing on the individual investor and the independent voter proclaim the pains of uncertainty. They explain the lack of attention to the shortage of retirement funding throughout the world. Compared with their appetite for stocks over the last generation, individual investors’ purchases of equity mutual funds beyond their tax-sheltered retirement plans is pathetic. Capital growth is not their answer to recognized long-term needs. Capital preservation through the ownership of bonds is where their smaller-than-normal excess investment dollars are going. The low apparent inflation rate is not a concern for them.

Upbeat notes

In contrast, the non-committee focused professional investor is becoming increasingly attracted to equities and equities with coupons known High Current Yield bonds, or if you will junk bonds. Their purchases are providing the upward momentum we have seen since the dog days of August. They are being reinforced by strategic and financial acquirers’ announcements or rumors.

One of our advantages in helping sizeable institutional and substantial net worth investors in mutual funds is that we talk with lots of very smart and aware portfolio managers and analysts. Without exception they expect better revenues and earnings to be generated by their investments than past comparisons. (To be fair, some are moderating their estimates for 2011, but still see them higher than their 2010 estimates.) Occasionally we supplement this research by interviewing operating corporate executives who report that business is better than in the recent past and that their order books are getting fatter. As many members of this blog community know, my wife Ruth and I regularly check-out one particularly glitzy mall and other stores. There is a discernable “buzz” in the air as we see more shopping bags leaving the mall on the arms of many different types of consumers.

Three upcoming events

“Beauty is in the eye of the beholder” is an old expression that the viewer sees what he or she wants to see. There are three opportunities that will give consumers/investors an opportunity to use their dollars to express whether these events are viewed as good or bad for them.

The US elections

The first will be the results of the mid-term US elections, which may lead to significant changes in the critical unelected, but extremely powerful staffs on the various Congressional committees and to some extent the so-called independent agencies. One might suggest that the stock market rise since Labor Day is discounting the favorable change. The second and third events are somewhat interrelated.

Attempts to manipulate Balance of Payments

The second item is the government's attempted manipulation of balance of payments among the countries of the world. If this practice was done in the private sector it would be illegal. The US government wants to create an artificial ceiling to the size of balance of payments surpluses (read: limit the size of the US balance of trade deficit). We know the reality of international trade, that constraints do not work. In the historic example of the Smoot–Hawley Tariff of 1930, enacted by a panicked US Congress, the world was plunged into a depression from a severe recession. The futility of limiting trade is evidenced by the fact that during almost every war in recorded history, the opposing sides traded with each other through third parties.

Gold vs. paper currencies

The third event or events is the pattern of learned experts predicting that the price of gold will rise to $1500, $2200, and $10,000. This is the wrong way to look at the price of gold according to a very smart friend of mine who has headed two major research departments. His contention, along with others, is that the price of gold is a contrary indicator which measures the decline of the value of paper currencies, led by the dollar.

The link between the government attempts to manipulate trade flows and the decline in the value of paper currencies is the governments’ induced inflation. When people trade using currency (as distinct from barter), on one side of an international trade, both the amount and the value of the currency play a role in setting price. The US along with many European governments is trying to answer unemployment problems by the injection of taxpayer funds to support the economy through the expansion of debt.

In November we will learn about the election, the ill-advised quantitative easing by the Fed (discussed in my blog last week), the meeting of the G-20 leaders, and the likelihood of further legislative actions in the “rump’ session of the US Congress. Whatever actually happens, the key to the near-term outlook for the stock market is what beauty will investors, particularly individual investors behold in the post-November world?

What to do?

What should intelligent long-term investors do in the face of the November issues? I would suggest that you ignore all of the headlines and focus on building a portfolio that is appropriate to your needs for at least the next ten years. Over that period we will get one or more major winds to fill our sails. This wind will give us ample opportunities to jettison any poor investments that we have made and to rebuild our reserves for future storms. Sail on...
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